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Forum Post: For the Economically Illiterate...

Posted 2 years ago on Nov. 29, 2012, 10:18 p.m. EST by clamor (-40) from Hopatcong, NJ
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The Great 2012 Cashout

Dividends offer a lesson in tax rates and investor behavior.

Perhaps you've heard from various economic sages that tax rates don't matter either to economic growth or taxpayer behavior. Don't tell that to the companies and individuals who are busy cashing out their investments or paying dividends to get ahead of the Obama tax scythe in January.

Costco, the giant wholesale-club operator, announced Wednesday that it will pay a special dividend of $7 a share before the end of the year. That's about $3 billion the company will return to shareholders that the feds will only tax at 15% rather than the 39.6% rate scheduled to kick in when the Bush-era tax rates expire next year. For households earning more than $250,000 in 2013, you can add another 3.8 percentage points in tax thanks to the ObamaCare surcharge. Costco's shareholders approved, sending its stock up about 6%.

The Journal reports that as of Wednesday morning some 173 companies had announced special dividends, compared to only 72 in the same period a year ago. A recent Bloomberg analysis found that from September to mid-November, 59 companies on the Russell 3000 stock index had declared one-time cash payments to shareholders, four times last year's pace.

"I find no precedent like this at all going all the way back to the 1950s," Howard Silverblatt of S&P Dow Jones Indices told the Journal. Then again, there's no precedent for the Obama Presidency.

Other companies, like the manufacturer Leggett & Platt, are moving up their regular quarterly dividend to be payable in December rather than in January. Wal-Mart did the same last week, moving its expected $1.34 billion dividend payout to this year. Watch for many more to do the same.

Shareholders should enjoy this windfall because the longer-term result of higher tax rates is that fewer companies are likely to pay any dividends, while others will limit their distributions. As casino magnate Steve Wynn summarized in a recent investor call: "When the taxes on the dividends are too high, then companies don't distribute, the shareholders don't get the dividends and Uncle Sam doesn't get the tax."

Mr. Wynn knows his history. Dividend payouts rose only modestly in the 1980s and 1990s when they were taxed as ordinary income. The Bush tax cut chopped the rate to 15% on January 1, 2003, on the sound economic reasoning that corporate income is already taxed once at the company level. Dividends reported on tax returns nearly doubled to $196 billion in 2003 from $103 billion in 2002. Dividend income hit $337 billion by 2006, more than three-times the pre-tax cut level.

It's also a good bet that some of the recent stock market volatility is due to investors seeking to realize capital gains at today's 15% tax rate, before that rate rises to 23.8% (including the ObamaCare surcharge) on January 1. When the capital gains rate last rose, to 28% from 20% as part of the 1986 tax reform, investors also cashed in before the higher rate took effect.

Tax revenue from capital gains in 1986 soared to $52.9 billion, then dropped to $33.7 billion in 1987 and stayed largely flat for nearly a decade. It boomed again after Bill Clinton and Newt Gingrich agreed to return the rate to 20% in 1997.

When government raises taxes on dividends and capital gains, it is lowering the after-tax return on stocks. Share prices will fall over time to adjust to that new rate of return, reducing overall wealth in the private economy, all other things being equal. As for the feds, history suggests they'll see a capital gains and dividend revenue windfall this year, but then a decline next year even at the higher rate.

It's the oldest lesson in tax policy: Tax something and you get less of it. In this era when envy trumps growth, the government is raising taxes on thrift, investment and risk-taking in the name of fairness and to finance more government spending. No one should be surprised when there are fewer dividends and capital gains to tax.

A version of this article appeared November 29, 2012, on page A16 in the U.S. edition of The Wall Street Journal, with the headline: The Great 2012 Cashout.

http://online.wsj.com/article/SB10001424127887324352004578131162698206512.html

7 Comments

7 Comments


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[-] 4 points by toobighasfailed (117) 2 years ago

It's true that when you tax something you get less of it, but in some cases concerning capital gains, that would be a good thing. After all, credit default swaps and collateralized debt obligations (the derivatives that blew up the economy) were all helped along by the capital gains tax cuts.

Those tax cuts help the overall economy when the investments are smart and useful, but when the investments are bogus, they're devastating.

Here's an article from Sheila Bair, former FDIC chair, where she expounds on this idea, saying that the tax cuts furthered the crisis: http://finance.fortune.cnn.com/2012/03/05/tax-reform-stimulus/

[-] 1 points by clamor (-40) from Hopatcong, NJ 2 years ago

From the article.

"Under our tax code, if you work for a living, your tax rate goes as high as 35%, but if your earnings come from capital gains or dividends, you have to give up only about 15% to Uncle Sam. "

False, it's NOT 15%. It's already been taxed once before. The 15% is a second tax.

"But hey, go manage a hedge fund and only pay 15%."

False again. Gives the impression that only the hedge fund mgr pays that tax. Everyone invested in that Hedge fund pays it on sale of securities.

"With an overheated market providing artificial gains in home prices, why not use your house like a credit card?" Hmmm. kinda sounds like Obama's nationalization of student loans, huh?

Sheila Bair's thinking is all wrong... learn from a REAL economist...

http://www.europac.net/commentaries/patriotic_millionaires_unmasked

[-] 1 points by toobighasfailed (117) 2 years ago

"More than half of today's tax benefit on investment income goes to people in the top one-tenth of 1 percent." source: http://www.npr.org/blogs/itsallpolitics/2012/11/29/166150808/why-dividends-capital-gains-are-big-part-of-fiscal-cliff-talks

I like a lot of what Schiff says, but I think there are ulterior motives for why he defends this particular tax cut. He's likely in that one tenth of one percent.

[-] 1 points by BetsyRoss (-744) 2 years ago

That's because the top one-tenth of 1 percent are the only ones capable of investing the money they earned previously and were taxed on in the past!

Capital gains taxes are not wrong or bad. ALLOWING people to swap credit defaults and exchange derivatives IS. The government shouldn't be able to punish or "tax" behavior that it allows to happen in the first place.

[-] 1 points by RedDragon (-161) 2 years ago

I think there's probably far too many economically illiterate here. To state it simply: It's just theft by government. Make a withdrawal and the Fed takes 20+ percent, the state takes 10 percent, and then we pay tax on the remaining as income. Under such conditions no one withdraws, meaning there is less income to tax, less disposable income to spend, and even, fewer home purchases. Which, let's face it, with these prices and rates should be going through the roof right now. They have been steadily tanking our economy over a period of many years and they are NOT going to let it recover at a risk to themselves; they're just going to take more.

[-] 1 points by quantumystic (1710) from Memphis, TN 2 years ago

i have no problems with costco their ceo makes under 500k and the employees average pay rate is 17$ an hr. plus benefits.

[-] -1 points by richardkentgates (3269) from Fort Walton Beach, FL 2 years ago

So we are supposed to care why? I could care less if investors are freaking out or if WallSt crashes. They are outdated parts of our economy. When the BIG corporations and WallSt are gone, there will once again be room for small biz.